Grappling Over Power

When the lights went out in California last spring, critics wondered if electricity deregulation had gone too far. After Enron's collapse this fall spiraled into the largest bankruptcy in American history, they were sure. "Bring back government regulation!" they urged.

Federal regulators, however, have quietly been pushing in the opposite direction. In a little-noticed ruling on July 12, the Federal Energy Regulatory Commission ordered the states and power companies to create four "regional transmission organizations," new super-networks to link the nation's electric power grids. FERC argued that these RTOs would provide consumers with more reliable power at lower cost. Worried about a repeat of California's rolling blackouts, FERC has pushed the states to create the new super-grids by July 2002.

Midwestern states reacted with enthusiasm. The region's power grid is especially fragile, and many businesses in the area have complained that unreliable power has hurt them. In December, 20 states, from Montana to Arkansas, joined in a new nonprofit operation to control the high-voltage transmission lines. The move drew rare acclaim. Ohio industrialists applauded the plan for bringing greater reliability to the power system, while the state's consumer counsel said it would bring customers more choices and lower prices.

Northeastern states, however, were furious about the FERC mandate. Connecticut Attorney General Richard Blumenthal called it "a power grab" that would switch control over the region's power supply "to a huge super-regional authority, unaccountable to the states and unresponsive to consumers." The New England power grid, he said, is one of the nation's few success stories, and FERC is meddling with that success.

Meanwhile, the Maryland Public Service Commission threatened to sue to stop the plan. Maryland is part of the Pennsylvania-New Jersey- Maryland Interconnection, one of the nation's oldest and best-regarded power grids. Because of the strength of PJM, regulators had concluded that a California-style crisis was unlikely. FERC nevertheless decided that PJM needed to merge with RTOs in New England and New York.

Maryland officials worry about how the states will share the grid's expenses. Transmission costs for PJM customers are about half of New York's. A merger would raise PJM rates and Marylanders would subsidize New Yorkers. Maryland's utility officials are concerned as well about technical issues such as the system's capacity and how to merge the complex computer systems that manage the system.

The region's regulators are most anxious about who will call the shots. Some of the plans being considered would give PJM a majority of seats on the governing board of the new RTO, which worries New York and New England grid managers. A three-way governance split, however, would make it hard for PJM to resist higher rates for its customers.

Part of the battle is technical. FERC believes that the existing decades-old transmission systems are not up to new challenges. When weather gets very hot or very cold, system operators have to scramble to get power to where it's needed. Sometimes they can't keep up, and brownouts spread. The problem often isn't power generation but power transmission--something larger and better-connected networks, FERC believes, could smooth out.

Part of the battle is economic. FERC has concluded that larger systems will produce better wholesale markets for power and that these markets will yield lower prices. Indeed, that has been the philosophy underlying energy policy since the Energy Policy Act of 1992, which deregulated the wholesale electricity market.

Now, that philosophy has run headlong into Enron's collapse and California's blackouts. Enron used wholesale trading to build its empire; California moved first and farthest in giving consumers choice in electricity suppliers. Those disasters give PJM officials ammunition in urging FERC to go slow lest they cause a coast-to-coast energy debacle. But Enron's disintegration came through financial, not energy, mismanagement. California's blackouts came not because there wasn't enough power but because its officials had offered the kilowatt version of a free lunch, where rates could go down but couldn't follow the market up.

These well-publicized failures have not deterred FERC, which is pursuing cases through the courts. The Supreme Court is readying a decision on state regulators' challenge of a FERC ruling that ordered utilities to allow other energy producers access to their transmission lines. A federal district court is considering another case, in which FERC ruled that all utilities involved in interstate electric transmission had to join a RTO.

These issues are quietly reweaving the tapestry of American federalism. Madison, Jefferson and Adams would have understood how seemingly arcane regional issues can explode into political brawls that are really about how to balance federal with state power. They're also a reminder that regional differences are still important today.